Government Policies, Residential Mortgage Defaults, and the Boom and Bust Cycle of Housing Prices

39 Pages Posted: 4 Dec 2010 Last revised: 25 May 2015

See all articles by Marius Ascheberg

Marius Ascheberg

Goethe University Frankfurt

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management

Holger Kraft

Goethe University Frankfurt

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

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Date Written: November 29, 2010

Abstract

We develop a dynamic simulation model for residential home prices in an economy where defaults on residential mortgages negatively affect housing prices and aggregate income. This simulation model enables us to study the impact of subprime defaults on prime borrowers and the impact of various government policies on the housing market boom and bust cycle. In this regard, our key conclusions are that: (i) there is a contagion effect from subprime defaults to prime defaults due to the negative impact of subprime defaults on aggregate income, and (ii) monetary policy is the most effective tool for decreasing mortgage defaults and increasing aggregate home prices in contrast to alternative government fiscal policies designed to loosen mortgage credit.

Suggested Citation

Ascheberg, Marius and Jarrow, Robert A. and Kraft, Holger and Yildirim, Yildiray, Government Policies, Residential Mortgage Defaults, and the Boom and Bust Cycle of Housing Prices (November 29, 2010). Johnson School Research Paper Series No. 18-2011, Available at SSRN: https://ssrn.com/abstract=1718249 or http://dx.doi.org/10.2139/ssrn.1718249

Marius Ascheberg

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Robert A. Jarrow

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Department of Finance
Ithaca, NY 14853
United States
607-255-4729 (Phone)
607-254-4590 (Fax)

Holger Kraft

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

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